DFA says this new plan will complement, not compete with, the services an advisor offers

Brooke’s Note: DFA is an asset-gathering demon, growing at a rate that is virtually unrivaled in the fund industry right now. That’s largely because nobody else has found a way to work so closely with RIAs. But if there’s one consolation that DFA’s rivals can take it’s that some investors and advisors still demand active management. Now it appears that DFA is prepared to take away that comforting thought by adding a bigger dollop of active management to its generally passive approach.

The new program represents a notable swerve for the giant mutual fund company, which is known for its longstanding passive approach among RIAs. Under the new managed DC plan, which will begin in November, participants’ accounts will be rebalanced monthly.

Booth even joked about his 30-year-old company’s traditionally passive approach. “As we’ve gotten older, I’ve started calling ourselves active. We work so hard it’s a shame to call us passive. But on the other hand, if you want a passive manager – then we’re passive.”

DFA’s new strategy will allocate a participant’s funds based on a number of factors including the person’s annual earnings, age and amount they save each year.

Taking aim at target date funds

The managed defined contribution plan will go head-to-head against the popular target date funds. Indeed, it was specifically designed to address many of the criticisms of those products, which determine a participant’s portfolio balance based solely on their retirement date.

Robert Merton lent his thoughts at the conference about the shortcomings of target-date funds.

Target date funds are filled with problems that the new managed DC plan will solve, says Robert C. Merton, a professor of finance at MIT who won the Alfred Nobel Memorial Prize in Economic Sciences and serves as resident scientist for DFA.

Merton says the new plan also directly tackles the industry criticism of target date funds which is that two people planning to retire in the same year may require different strategies and shouldn’t necessarily have the same portfolio, for instance if one person is aiming for a retirement income of $100,000 and the other person is seeking a retirement income of $50,000.

Really active

The DFA Managed DC plan will have four underlying funds, three which are fixed income and one that is global equity. Participant strategies will be decided individually based on their age, income, contribution rate and marital status.

Merton says a key to this strategy is that it recognizes that participants approach their retirement by looking at the amount of monthly income they hope to have in retirement and not necessarily when they intend to retire.

The new system will be so active that participants will receive e-mails alerting them if they’ve fallen behind in their retirement goals.

DFA has been using this approach since 2006 in the United Kingdom with three big firms. The plan is awaiting SEC approval for use in the U.S.

Erich Reinhardt: It’s a mentality shift.

Added value

Addressing concerns that the plan will compete with advisors, DFA says this new plan will complement the services an advisor offers to employees.

The product will cost 45 basis points, according to BethAnn Dranguet, vice president of Dimensional Retirement. At that price, she says, advisors can still charge their own fee on top of the cost of the product and provide added value to clients.

One record keeper, ASPire Financial Services has already signed up to offer this product to its advisors. Pete Kirtland, president of the St. Petersburg, Fla.-based firm, says his firm is the first record keeper to step up to the plate to offer this product in the fall.

He, too, agrees that advisors will be able to add value because by offering this strategy to clients they’ll be able to show in a few years’ time how participants’ have increased their chances of saving enough for retirement.

ASPire provides record keeping for 7,000 advisors with 125,000 participants and has $4 billion in assets.

“This will improve participants’ chance of retirement success and it’s very positive for advisors to show this improvement to plan sponsors,” Kirtland says. “It will also drive up the advisor’s assets under management because people will be saving more.”

Too dramatic?

It’s likely this program will be accepted by larger plans first, says Gary K. Allen, with Prudent Investors Advisors LLC in Arcata, Calif. He points out that many small employers simply won’t have the information available on all of their employees for this strategy to be successful.

Skip Schweiss: If advisors use this tool they can still give personalized advice to the top 20 employees. It’s a great combination for an advisor.

“I think a managed DC plan is a tremendous process,” he says. “But we have to have systems and procedures in place.”

“For really large employers it’ll be really effective,” he says. “Our advisors are giving advice to participants and it’s working. This will be a good complement but it’ll take time to trickle down to small [plans].”

Erich Reinhardt, vice president of Loring Ward, which provides turnkey solutions for RIAs in the 401(k) arena, also believes it will take time for participants to get used to this new idea. His firm manages $7 billion in assets.

Joe in the mailroom

But Skip Schweiss, managing director of corporate services for TD Ameritrade, says he thinks this is an innovative approach and believes advisors will be eager for this type of solution.

“One of the things we hear from advisors is they can’t afford to deal with Joe in the mailroom with his $2,000 participant balance. In this plan, that participant would get an e-mail to tell them they’re falling short. If advisors use this tool they can still give personalized advice to the top 20 employees. It’s a great combination for an advisor,” he says.

Merton, as one might expect, has no doubts about the success of this new strategy. “We will manage it dynamically and are addressing all of the risks,” he says. “We will make sure this works effectively.”

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